If you are a higher rate taxpayer it may be prudent to talk to us sooner rather than later about your retirement planning provision, following remarks made by the government’s pensions spokesman, Lord McKenzie. He refused recently to allay the concerns of individuals earning below £150,000 that they may also see their ability to claim income tax relief on pension contributions restricted by lowering still further the threshold announced during Budget 2009.
The Chancellor announced his intention that from 6 April 2011 anyone whose income exceeds £150,000 would start to see a progressive reduction in the tax relief they obtain on pension contributions. Those with an income over £180,000 will only receive tax relief at the basic rate, currently 20 per cent.
Anti-forestalling provisions were also introduced with effect from Budget Day to prevent individuals anticipating the future changes and taking advantage of the consultation period to maximise their position.
The new rules could impact on anyone who makes personal pension contributions, either as a self-employed individual or as an employee, or for whom contributions are made by their employer to either a defined contribution or defined benefit company scheme. This includes contributions made by way of a salary sacrifice arrangement, where a reduced salary is taken which the employer then contributes to a corporate pension scheme.
Currently, if you earn less than £150,000 annually, pensions still remain a very tax-efficient way to accumulate wealth for your retirement. Contributions paid to your pension receive tax relief, the money grows free of capital gains tax and at retirement you can withdraw up to 25 per cent of your fund’s value as a tax-free lump sum.
The Association of British Insurers (ABI) have warned that the changes announced to restrict pension tax relief for higher earners would also introduce an extra layer of complexity to pensions, going against the ‘A-Day’ measures that were introduced in 2006 to simplify the pensions tax regime.
The measures in themselves, the ABI commented, would affect only a small number of high earners, but they were concerned that the government was breaching the principle under which people who saved for their retirement got tax relief.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.